There are nearly 4 million small businesses in California, making the state a leader in entrepreneurship. A large percentage of California businesses are limited liability companies (LLCs). LLC is a popular type of business entity structure among small business owners because it offers a combination of flexibility, legal protections, and tax advantages.
California has one of the highest levels of business regulation in the country, which means there are a lot of rules to know and follow in order to set up an LLC in California. Here, we’ll break down everything you need to know to successfully form an LLC in California.
Forming an LLC in California: Step-by-Step Instructions
Anyone who wants to set up an LLC in California must register their company with the California Secretary of State. The Secretary of State defines the rules and fees for businesses that want to register as LLCs.
Here are the steps for forming an LLC in California:
Step 1: Choose a Name for Your California LLC
The first step to form a California LLC is to choose a business name. Under California law, LLCs cannot choose a name that’s so similar to another business’s name that it would cause confusion among the public.
Names for California LLCs must end with “Limited Liability Company,” “LLC,” or “L.L.C.” The word “Limited” can be abbreviated as “Ltd.” and “Company” can be abbreviated as “Co.” Your LLC’s name cannot contain any of the following words: bank, trust, trustee, incorporated, inc., corporation, corp, insurer, or insurance company.
You can search LLC names that are currently on file with the Secretary of State on their Business Search tool. If a name appears to be available, you can request a more formal name availability confirmation by mailing a completed Name Availability Inquiry Letter to the California Secretary of State office in Sacramento. Your inquiry will be processed in approximately two business days.
Optionally, you can also reserve a business name for up to 60 days while you complete other steps for setting up your business. To reserve a name, you must mail or drop off in person a Name Reservation Request Form, along with a $10 reservation fee and $10 handling fee. You can request to reserve up to three names.
A name availability search or name reservation isn’t required to form your LLC, but it can give you some peace of mind that you’ve chosen a legal name for your business. That said, keep in mind that even if the Secretary of State responds favorably to a name inquiry or grants a name reservation request, that’s not a guarantee that the name complies with trademark laws. Ultimately, it’s up to you or your business attorney to understand all name requirements and choose an appropriate name for the LLC.
Photo credit: Sos.ca.gov
Step 2: Choose a Registered Agent in California
Every LLC in California must have a registered agent. A registered agent is an individual or company that accepts legal and official documents on your business’s behalf.
In California, the rules for individuals to serve as registered agents are as follows:
- Must be 18 years or older
- Must be a California resident with a physical address in California (no P.O. boxes)
- Available to accept documents during normal business hours
As long as you comply with these rules, you or another member of your LLC can serve as registered agent. However, this often gets tricky. For example, if you’re out sick one day and can’t accept a legal document at the business address that’s on file, you could run into legal trouble with the state. For this reason, many businesses choose state-approved online legal services to serve as their registered agent. We recommend Incfile for registered agent services.
Step 3: Obtain California Business Permits
Virtually every small business operating in California needs to obtain a business license, regardless of the industry the business belongs to. The basic business license in California is called a general business license, also known as a business tax certificate in some localities. Cities and counties issue these licenses, and if you do business in more than one location, you’ll need multiple licenses.
California issues professional licenses for certain regulated professions, like doctors and architects. However, LLCs are not permitted to provide professional services. Professionals must utilize alternative business structures, such as corporations or limited liability partnerships.
Businesses in California that sell or lease merchandise must apply for a seller’s permit from the California Department of Tax and Fee Administration. And if you’re doing business under a trade name that’s different from your LLC’s legal name, then you’ll also need to file for a fictitious business name/”doing business as” name.
The Governor’s Office of Business and Economic Development has more information about permits that are required for California LLCs.
Step 4: File Articles of Organization
The next step to form your LLC is to file articles of organization with the state of California. You can file the form online for faster processing, or print and submit the form by mail or in person.
In California, LLC articles of organization must include the following:
- LLC name
- Address of the LLC’s California office
- Registered agent information
- Whether the LLC will be member-managed or managed-managed
- Name and signature of the organizer who is filling out the form (this usually is, but need not be, a member or manager of the LLC)
The filing fee for articles of organization is $70. Make sure you’re filling out the correct form for your company. Domestic LLCs—LLCs that are based in and organized under the laws of California—must fill out Form LLC-1. Foreign LLCs—those that are formed under the laws of another state but want to do business in California—must fill out Form LLC-5.
Once you submit your articles or organization, the state of California generally takes about one week to process your articles (the state regularly updates processing times on their website). If approved, the state will send you a stamped copy of your articles of organization. You should also receive a 12-digit identification number that you will use on other state paperwork.
If you’ve reached this point, congratulations! You’re now authorized to do business in California as an LLC. But there are still a few more steps you need to follow to ensure that your LLC remains in good standing with the state.
Photo credit: Sos.ca.gov
Step 5: Draft an LLC Operating Agreement
The state of California requires members of an LLC to enter into an operating agreement, either shortly before or shortly after filing articles of organization. Although a verbal agreement is okay, it’s best to have a formal, written operating agreement.
The LLC operating agreement should contain the following types of information:
- The purpose of the LLC, including products or services offered
- Names and addresses of all the members (and the manager, if there is one)
- Financial contributions of each member
- Each member’s ownership interest in the company and division of profits and losses
- Procedures for admitting new members
- Procedures for electing a manager if the LLC is manager-managed
- Meeting schedule and procedures
- Dissolution procedures
You won’t file your operating agreement with the state. Rather, you should store your operating agreement with other important business records. Should you use a service like IncFile to create your LLC, most of their packages come included with a customizable operating agreement.
Step 6: File a Statement of Information
LLCs in California must file a Statement of Information with the Secretary of State within 90 days of formation and every two years after that. This form can be submitted online, by mail, or in person, along with a $20 filing fee.
The purpose of the Statement of Information is to ensure that all information about the company that’s on file with the state is accurate and up to date. If your business’s address or registered agent information has changed, for example, the Statement of Information is where you’d indicate that.
Photo credit: Sos.ca.gov
Step 7: Comply With Tax Obligations
LLCs formed in California, as well as LLCs formed out of state that are registered to do business in California, are required to pay four main types of taxes. The first is an $800 annual franchise tax that all LLCs must pay. The second is a gross receipts tax that varies based on the total revenue of the LLC:
- $0 to $249,999 total revenue = no gross receipts tax
- $250,000 to $499,999 gross revenue = $900
- $500,000 to $999,999 gross revenue = $2,500
- $1 million to $4,999,999 gross revenue = $6,000
- $5 million + gross revenue = $11,790
Members of LLCs must also pay personal state income taxes on their share of the LLC’s profits. Unless an LLC elects to be taxed as a corporation, the income of the LLC passes through to the owner’s personal income tax return.
Lastly, LLCs with employees must withhold payroll taxes from their employees’ wages and pay the employer share of payroll taxes. Employer payroll taxes in California are 3.5% for the first two to three years, and variable after that based on industry and a number of other factors.
Note that there might be other tax obligations for your LLC. For example, if your LLC elects to be taxed as a corporation, then you would follow California’s corporate tax rules. Businesses must also collect sales taxes for certain products and services.
Step 8: Don’t Forget Federal Requirements
In addition to California state requirements for LLCs, you’ll also need to comply with federal requirements.
For instance, LLCs with employees and LLCs that are taxed as corporations must apply for an employer identification number (EIN). An EIN is used to identify your business when you file your federal business taxes.
LLCs members must also pay 15.3% self-employment taxes to cover social security and medicare obligations. And if you have employees, you must withhold social security and medicare taxes from your employees and pay the employer share of these taxes.
Benefits and Drawbacks of Forming an LLC in California
There are numerous pros and cons to setting up your business as an LLC in California. Many people choose to form LLCs because they offer operational flexibility but are easier to maintain than corporations. But it’s not always that simple.
- Limited liability for members (members aren’t personally liable for business debts and lawsuits)
- Fewer reporting and recordkeeping requirements than corporations
- Avoid double taxation of C-corporations
- California imposes a gross receipts tax on LLCs, which corporations don’t have to pay
- High self-employment taxes at federal level
- Can’t form an LLC if you’re in a regulated professional field, such as a medical practice
As you weigh these pros and cons, make sure you consider other types of business entities. The easiest way to get started in business is as a sole proprietorship or partnership. These business types require much less paperwork and are easier to file taxes for. If you’re planning to raise money from investors, then you should consider a C-corporation or S-corporation. The ability to issue and sell stock makes the corporation a more suitable structure for investor-backed companies.
Bottom Line on Forming an LLC in California
Setting up an LLC is popular among entrepreneurs in the Golden State. LLCs provide a nice combination of operational flexibility and legal protections. However, LLCs in California might be paying more in taxes compared to corporations and other business types. It’s a good idea to walk through your business entity options with a lawyer before deciding to form your business as an LLC. Once you’re ready to form your LLC in California, we suggest using IncFile to file your formation papers.